The tough thing with bubbles is asking why we “give a frik”.

In one sense, a bubble is just an income transfer between people. This doesn’t matter in either monetary policy or financial stability terms – but it is the main reason people get so wound up!

The only reason we care is because we are worried about banks lending during a bubble and not taking into account systemic risk. As a result, we should act on the basis of that. Acting here involves pricing the systemic risk stemming from the asset class behind it … not monetary policy. And even here, the goal isn’t to “get rid of the bubble” which is in that sense psychological – it is to prevent spillover effects.

A monetary policy “issue” may come from wealth effects, or the easing of a credit constraint. But that just tells us that “demand” will rise more quickly than we had anticipated … so its part of what they already do.

This is all well and good, and in monetary policy terms we do not need to know whether something is a bubble or not. Even post crisis, bubbles are not a monetary policy issue.

One could argue that there is a ‘bubble’ in Xero’s share price, however, it could be that the share price, while volatile, doesn’t plunge back down again – so is there really a bubble to be worried about?

I’m not sure I see a lot of difference between a ‘bubble’ forming in a share vs the housing market – time frame are of course different, but lets say that prices rise for a period in Auckland then flatten out for a while before moving further up – where is the bubble?

The RB wants to be sure that it is being seen as cautious, but not stuff the housing market, because its only Auckland and to a lesser extent Canterbury that are seeing sustained price increases… maybe they are talking out of both sides of their mouth because their real options are in fact quite limited